Hungary Cuts Main Rate to Record as Utility Costs Curb Inflation

Hungary’s central bank cut its benchmark interest rate to a record low as state-mandated reductions in household electricity prices helped keep inflation below the bank’s target.

The Magyar Nemzeti Bank reduced the two-week deposit rate to 3.4 percent from 3.6 percent at a meeting today, matching the forecasts of 21 of 22 economists in a Bloomberg survey. One predicted a cut to 3.45 percent. The central bank will release a statement on the decision at 3 p.m. in Budapest.

Monetary-policy makers have lowered borrowing costs for 15 straight months, slashing the benchmark by more than half to buoy recovery from a recession last year. “Subdued” inflation may let policy makers trim the rate to near 3 percent, central bank President Gyorgy Matolcsy said last month. To help tame prices, the government has imposed a one-fifth reduction in utility costs in 2013.

“The Monetary Council may justify its dovish stance by the soft headline inflation,” Eszter Gargyan, a Budapest-based economist at Citigroup Inc., said yesterday by e-mail. Price growth “may move even lower in December 2013 because of the impact of the next round of regulative utility-price cuts.”

The forint, which has gained 1.8 percent in the last month, the best performance among 24 emerging-market currencies tracked by Bloomberg, traded at 293.33 per euro as of 1:38 p.m. in Budapest. The yield on the benchmark government bond due 2023 dropped to 5.35 percent from 5.9 percent a month ago.

More Easing

Forward-rate agreements used to wager on three-month interest rates in three months rose 2 basis points to 3.12 percent. That compares with the 3.54 percent Budapest interbank offered rate, indicating bets for about 40 basis points of rate cuts in the next three months.

Rates will bottom at 3 percent to 3.2 percent in the last quarter before rising in the second half of next year as the inflation outlook worsens, according to Citigroup’s Gargyan.

Eastern European central banks are diverging as their economies show varying degrees of health. Poland left borrowing costs at a record low for a second meeting this month as policy makers assess recovery from a slowdown, while Romania cut its benchmark for a third month on Sept. 30 to bolster growth.

Hungarian policy makers were split last month on how much to trim interest rates, with six Council members supporting the 20 basis-point reduction and one voting for a 10 basis-point cut, according to the minutes of the meeting, published Oct. 9.

Growth, Inflation

Rate-setters cited subdued economic growth and the slowest inflation in almost 40 years as driving rate cuts.

Gross domestic product rose 0.1 percent from the previous three months in the second quarter after a 0.6 percent advance in the January-March period. The inflation rate, which increased to 1.4 percent in September from 1.3 percent the previous month, has remained below the central bank’s 3 percent medium-term target since February.

The government, which faces elections in 2014, ordered an 11.1 percent cut in utility charges starting next month, adding to a 10 reduction at the start of this year.

In addition to rate cuts, the central bank is providing 2.75 trillion forint ($13 billion) of interest-free funds to commercial lenders to boost credit to small and medium-size companies. The two policies in tandem risk endangering the forint, according to Daniel Hewitt, an economist at Barclays Plc in London.

The “double monetary-policy loosening” consisting of rate cuts and the Funding for Growth plan carries risks as the central bank may “go too far” with rate cuts, leaving the forint vulnerable to a turn in global sentiment, he said yesterday by e-mail.

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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